Release of Contingencies

Yesterday I met with a client for “The Big Day.” In most real estate transactions I’ve been a part of, there are several big days, but for me, the biggest day is the release of contingencies date. You see, in a standard C.A.R. (California Association of Realtors) Purchase Agreement, which we mostly use here in California, the buyer is given an inspection or contingency period – by default, 17 days – in which to inspect the property and make sure that it is acceptable. During this time the buyer may, for instance, order a home inspection, termite inspection, etc.

Until the 17 days are up (or however long the contract states that the inspection period shall be), the buyer is free to back out of the transaction with virtually no risk of losing the deposit. It’s great for a buyer, not so great for the seller. Once the seller agrees to the purchase, the seller can’t back out so long as the buyer is abiding by the contract terms, but the buyer can, up to the end of the inspection period. What’s nice also is that there’s no arguing – the seller can’t say, for example, “Oh no, there’s no mold!” – the buyer can back out for any reason whatsoever (“I don’t like the way the sun hits the deck”) and actually, the buyer doesn’t have to give a reason at all. The right for the buyer to cancel the contract for any reason – or no unreason – under the terms of the inspection contingency is absolute.

When the inspection period is over, and if the buyer wishes to proceed with the purchase, there’s a document to sign called the Contingency Removal form. There are two sets of contingencies: physical, and financial. Normally when I write a contract, I write the same release date for both types of contingencies. A buyer can release the physical contingencies but may, for example, ask for an extension on the financial contingencies – for example, if the buyer has not been able to get an appraisal yet, or if the first appraisal came in under value…but if the buyer is not able to get an appraisal for the purchase price, this too is grounds for the buyer to withdraw from the contract.

There is another form that normally gets signed at the same time as the first Contingency Release form: “Receipt for Increased Deposit & Liquidated Damages.” At the time the buyer releases the contingencies and agrees to move forward with the purchase, the contract will typically call for an increase of deposit if the buyer has a deposit that is less than 3% of the purchase price.

The initial deposit a buyer makes is typically 1%; the “increased deposit” due at the time the buyer releases contingencies is usually an additional 2%, bringing the total deposit to 3% of the purchase price. This second form is a simple form that states how much the buyer is increasing their deposit by (although it’s already outlined in the contract), what the total deposit now is…and then it states that if the buyer defaults on the purchase after signing this form, the seller may keep the deposit as liquidated damages. 3% in cash of just about any purchase of real property in the greater Bay Area is a lot of money to lose!

That’s why I call it “The Big Day.” This is the day when the buyer agrees to proceed, or not, with the purchase – and if the buyer wants to proceed, the buyer must put down an additional chunk of cash which is a non-refundable deposit on the property. My client did sign both forms, he gave me the increased deposit, and in about 30 days or so he’ll be Capitola’s newest home owner!